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TMI Blog2025 (4) TMI 522X X X X Extracts X X X X X X X X Extracts X X X X ..... a, Shri Rajneesh Lamba s/o Shri Nand Kishore Lamba, Shri Nand Kishore s/o Late Shri H.C. Lamba, Versha Talwar w/o Shri Vikram Talwar, Rajesh Jain, Pannalal Bhansali S/o Late Hira Lal Bhansali, Mrs. Anuradha Modi Wife of Sh. Krishan Kumar Modi, Mr. Krishan Kumar Modi Son of Sh. SR Modi, Ms. Bhavini Modi Daughter of Sh. Krishan Kumar Modi, Ms. Somya Modi Wife of Sh. Harsh Hari Modi, Ms. Aniha Modi Daughter of Sh. Krishan Kumar Modi And Mr. Harsh Hari Modi Son of Sh. Krishan Kumar Modi versus Bharti Telecom Limited, The Registrar of Companies, NCT of Delhi & Haryana, The Regional Director, Northern Region, Ministry of Corporate Affairs, Bharti Telecom Limited, The Registrar of Companies, NCT of Delhi & Haryana, The Regional Director, Northern Region Ministry of Corporate Affairs,Bharti Telecom Limited, The Registrar of Companies, NCT of Delhi & Haryana, The Regional Director, Northern Region Ministry of Corporate Affairs, Bharti Telecom Limited, The Registrar of Companies, NCT of Delhi & Haryana, The Regional Director, Northern Region Ministry of Corporate Affairs, Bharti Telecom Limited, The Registrar of Companies, NCT of Delhi &Haryana, The Regional Director, Northern Region Minist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been pleaded by Mr. Anirudh Suresh. 3. Mr. Hasmukh Mithalal Nagori is the Appellant in Company Appeal (AT) No. 274 of 2019. This case has been pleaded by Mr. Anirudh Suresh. 4. There are three Appellants in Company Appeal (AT) No. 275 of 2019 i.e., Adwaeet A. Shah, Adwaeet A. Shah (HUF) and Arvind M Shah (HUF) ('Appellants'). This case has been pleaded by Mr. Anirudh Suresh. 5. There are seven Appellants in Company Appeal (AT) No. 276 of 2019 i.e., Mr. Mahendra A. Shah, Dr. Kumar H. Shah, Mrs. Dipti K. Somaiya, Mr. Krishnakumar D. Somaiya, Mrs. Jyoti Sunil Desai, Mr. Abhay Y. Dadbhawala & Mr. Vipul Jayantilal Modi ('Appellants'). This case has been pleaded by Mr. Anirudh Suresh. 6. Mrs. Chhaya Kamlesh Parekh is the Appellant in Company Appeal (AT) No. 277 of 2019. This case has been pleaded by Mr. Anirudh Suresh. 7. Mrs. Kanta Shah is the Appellant in Company Appeal (AT) No. 278 of 2019. This case has been pleaded by Mr. Anirudh Suresh. 8. Mr. Ramesh Shah is the Appellant in Company Appeal (AT) No. 279 of 2019. This case has been pleaded by Mr. Anirudh Suresh. 9. Mrs. Bharti Vinod Shah is the Appellant in Company Appeal (AT) No. 280 of 2019. This case has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain objections with respect to the valuation of the shares for the purposes of capital reduction. 20. It is noted that the Respondent No.1, i.e. BTL was incorporated on 29th July, 1985, under the erstwhile Companies Act, 1956. Initially, BTL was listed on the stock exchanges of Delhi, Ludhiana, Kolkata, and Bombay. 21. In 1986, BTL issued a total of 16.5 lakh shares to various stakeholders, including promoters, directors, employees, associate companies, and the public and all 31,800 equity shares allocated for public subscription were successfully subscribed. 22. In the year 1991, various shareholders including the promoters, employees, and the general public again subscribed to all 1.525 crore shares offered. Similarly other subscription of all equity shares offered by BTL were also subscribed. 23. It is significant to note that in October 1999, BTL was delisted from the Bombay Stock Exchange due to the Promoter Group (Bharti) acquiring more than 90% of BTL's shares. This delisting was followed by similar actions on other stock exchanges: Kolkata, Ludhiana, and Delhi, with effective dates of 1st November 1999, 25th January, 2000, and 6th March, 2000, respectively. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity public shareholders demonstrated their commitment by making significant investments and subscribing to this Rights Issue, indicating that they did not perceive their investments in the unlisted Company as locked up. Subsequently, on 03.11. 2017, after a gap of 15 years and 8 months from BAL's listing on 18.02.2002, BAL became a subsidiary of BTL, fulfilling the stated objective of the Rights Issue. Despite this development, the minority shareholders continued to remain invested and never sought an exit opportunity. 30. The Appellants elaborated that BTL planned to involve SingTel as partner in their telecom business and in this backdrop, a Valuation Report was obtained from J C Bhalla & Co, estimating the fair value per equity share BTL at Rs. 310/- per share, with 18th January, 2018, as the relevant date for valuation. The Appellants clarified that the valuation was determined using the "Adjusted Net Assets Method", considered most appropriate for an investment company and an internationally accepted pricing methodology. The Appellants clarified that this method aligns with RBI guidelines and FEMA notification no. FEMA 20(R)/2017-RB dated 7th November, 2017, concerning th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est an exit opportunity to monetize their shareholding due to their investments being locked up, nor would BTL necessarily save administrative costs by servicing them. The Appellants argued that the Notice makes these claims, whereas relevant extracts from BTL's Annual Returns, specifically the shareholding pattern, demonstrate a significant volume of trading in the market and off-market, indicating liquidity in BTL's equity shares and contradicting the notion of "locked up" investments. 36. The Appellants submitted that the administrative costs for servicing the Public Minority Shareholders, as cited in the Notice, was minicule and negligible, as evidenced in the extracts of BTL's Annual Returns, and is reproduced for ready reference. Year Total Revenue from operations Communication Expenses Printing & Stationery Expenses Total Admin Expenses Admin Overheads to Revenue (%) 2013-14 1,85,50,02,000.00 24,000.00 76,000.00 1,00,000.00 0.0054 2014-15 6,16,88,12,000.00 23,000.00 64,000.00 87,000.00 0.0014 2015-16 4,71,83,61,000 2,86,000.00 2,20,000.00 5,06,000.00 0.0107 2016-17 3,69,61,17,000 1,57,000.00 1,83,000.00 3,40,000.00 0.0092 2017-18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enced by the Scrutinizer's Report. 41. The Appellants submitted that, after receiving the notice, attempts were made to obtain clarifications by calling 0124-4222222, the contact number listed on the Postal Ballot form. The Appellants submitted that despite the mention of a Valuation Report and Fairness Opinion in the Notice, these documents, necessary for understanding the items of business, were not shared with them. The Appellants stated that the documents were also not provided during personal visits to BTL's office, as per the address in the Notice. The Appellants highlighted the emails sent by the Appellant to BTL as evidence of their sincere requests to BTL for sharing the Valuation Report and Fairness Opinion, even offering to pay for photocopying, scanning, or postal charges. The Appellants contended that this lack of transparency contradicts the Board of Directors' claim in the Notice of conducting the reduction of share capital in a fair and transparent manner. 42. The Appellants submitted that the Public Minority Shareholders had invested in BTL for over two decades since its delisting in 1999 and therefore BTL's decision to conduct the share valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial issue was the repayment of BTL's debts, as detailed in the notice to shareholders. The Appellants argued that BTL obtained a Valuation Report from J C Bhalla & Co, who estimated that the fair value per equity share of BTL was Rs. 310/- per share in which the relevant date considered by the valuers for the purpose of valuation was 18th January, 2018. The Appellants clarified that the said valuation was done on the basis of Adjusted Net Assets Method which is appropriate method for an Investment company being an internationally accepted pricing methodology in contrast to Multiple Option Pricing Models and empirical studies used by Ernst & Young Merchant Banking Services Private Limited in valuation in the present case. The Appellants contended that this discrepancy highlight that the Reduction of Share Capital proposed by the Respondent No. 1/ BTL does not comply with the provisions of Section 66 of the Companies Act, 2013. 46. The Appellants submitted that if the Respondent No. 1/ BTL proposed the Reduction of Share Capital on the basis of having excess capital, it would directly contradict the fact that it raised debts to the tune of Rs. 3,100 Crores through bond sales to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 and the valuation was done on the basis of Adjusted Net Assets Method which was an appropriate method. 50. The Appellants submitted that the E&Y Valuation Report is flawed because it fails to include a control premium, which is required when minority shareholders where forced out and inappropriately applied a 25% discount for lack of marketability (DLOM) despite evidence of liquidity. The Appellants submitted that the 25% DLOM applied in the E&Y Valuation Report is arbitrary, based on outdated data from developed economies and foreign companies (1966-2006). The Appellants argued that as an investment holding company with over 90% of its assets in BAL of which it holds 50.10% (as of 31st March, 2019), and BAL being a liquid, actively traded index stock, BTL's shares were marketable among Public Shareholders. 51. The Appellants submitted that the act of selective capital reduction is not only unfair, unjustified, coercive, discriminatory, and illegal, but the Respondent No. 1/ BTL proposal to pass the resolution through postal ballot and e-voting without conducting an in-person/physical meeting violates the rights of the Public Shareholders. The Appellants alleges that BTL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares. 56. The Appellants conceded that the identified shareholders were indeed minority public shareholders as their voting strength was only 1.09%, which is not very significant in comparison to majority promoter shareholders i.e., Bharti SingTel Group who have conjoint voting strength of 98.91%. The Appellants however pleaded that being minority shareholders it was the duty of majority public shareholders as well as the Tribunal to proceed with the scheme in reasonable, unbiased and transparent manner. 57. The Appellants pointed out that they themselves appointed a registered valuer Mr. Mayur Popat holding Registration No. IBBI/RB/06/2019/1173 which categorically stated that DLOM should not have been applied in the present scheme. 58. The Appellants also pointed out the alleged irregularities by independent valuer Ernst & Young Merchant Banking Services Private Limited who contravened various provisions laid down in model code of conduct by registered valuers as laid down in Annexure-I in companies (registered valuers and valuation) Rules, 2017 and relevant Rule No. 13, 14, 15 & 17 which have been violated. 59. Concluding their arguments, the Appellants urged this Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative and other costs associated with servicing a dispersed and minimal percentage of shareholding across India and overseas. 65. The Respondent No.1 submitted that the Board of Directors, after a detailed examination and analysis of various available options, concluded that reorganizing the capital structure through a reduction of equity share capital held by the identified shareholders would be the most appropriate solution. This decision was made in accordance with Section 66 of the Companies Act, 2013, read with the National Company Law Tribunal (Procedure for Reduction of Share Capital of Company) Rules, 2016, as it provides a lawful and structured mechanism to offer an exit to these shareholders while ensuring compliance with applicable legal provisions. 66. The Respondent No.1 submitted that to ensure fair consideration for the proposed reduction of share capital held by the identified shareholders, the Respondent No. 1 appointed Ernst & Young Merchant Banking Services Private Limited as independent valuers. The independent valuers conducted a valuation of the Respondent No. 1, BTL, and submitted their Valuation Report dated 19th June, 2018, and prepared to determine an eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.1 submitted that following the Board's approval and shareholder resolution, the Respondent No. 1 it filed a petition with the Tribunal on 2nd August, 2018, seeking approval for the proposed capital reduction. The Respondent No. 1 also placed on record the consents and no-objections from all creditors, ensuring compliance with legal requirements. The Regional Director/ Respondent No. 3 herein, subsequently filed a no-objection report dated 23rd January, 2019, confirming that the Respondent No. 1 had adhered to due process under the law. The Respondent No. 1 submitted that after considering detailed submissions and objections raised by intervenors, including the present Appellants, the Tribunal approved the capital reduction and confirmed it through its impugned order dated 27th September, 2019. 71. The Respondent No. 1 denied that public shareholders did not seek an exit opportunity, arguing that the Appellants is misleading this Appellate Tribunal by misinterpreting the Respondent's Annual Returns. The Respondent No. 1 further clarified that BTL was delisted, and thus, there was no market platform for trading, which explains the lack of significant volume trades. Regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted an exit route following the delisting of the Respondent's shares, which rendered them unmarketable on any stock exchange in India. In compliance with legal requirements, the Respondent No. 1 sent a Notice of Postal Ballot/Electronic Voting along with an explanatory statement dated June 19, 2018, to all shareholders. The resolution for capital reduction was approved with overwhelming support, as 99.90% of the shareholders who voted were in favor, including approximately 76.35% of the identified shareholders. The Respondent No. 1 submitted that after going through entire process, the Tribunal rightly relied on the precedent set in Reckitt Benckiser India Ltd [(2005) SCC OnLine Del]. and observed that decisions regarding share capital reduction are matters of domestic concern, where the majority decision prevails. 76. The Respondent No.1 asserted that all shareholders, including the identified shareholders, were duly informed about the special resolution through the Notice of Postal Ballot/Electronic Voting and the explanatory statement dated 19th June, 2018. A full opportunity was provided to all shareholders to vote or raise concerns, with a one-month window for clarificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his allotment were utilized for deleveraging the Respondent No. 1's balance sheet, thereby benefiting all shareholders, including minority shareholders, by emphasising equity valuation. However, since the preferential allotment, telecom stocks have declined by approximately 30% due to ongoing tariff wars and industry challenges, making any comparison between the preferential allotment price and the present capital reduction price misleading. 80. The Respondent No.1 submitted that the offered price to the identified shareholders was Rs.196.80 per equity share, not Rs.163.25 as alleged by the Appellants. This includes Rs.163.25 as the base price and an additional amount accounting for dividend distribution tax. 81. The Respondent No. 1 denied that the Valuation Report failed to account for a control premium or that the Respondent orchestrated the capital reduction to gain 100% control over the company. It is the case of the Respondent No. 1 that the question of a control premium does not arise as there is no change in control of the Respondent No.1 pursuant to the capital reduction and they, in any case, already had absolute majority in the shareholding. 82. The Respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Association also allows for such reduction through a special resolution. The Respondent No. 1 stated that the Articles of Association form a contractual agreement between BTL and its members, as well as among the members themselves. Therefore, the Appellants, having agreed to these terms, cannot now claim discrimination arising from their enforcement. The Respondent No. 1 submitted that judicial precedents have consistently upheld the legitimacy of selective capital reduction when conducted in compliance with legal requirements and Courts have emphasized that such reductions are permissible if they are fair, equitable, and not malafide. The Respondent No. 1 cited the judgement Sandvik Asia Ltd v. Bharat Kumar Padamsi, where it was held that selective reduction is valid if non-promoter shareholders are paid fair value for their shares and an overwhelming majority approves the resolution. 85. The Respondent No.1 further denied that it avoided holding a physical meeting to suppress shareholder views. The Respondent No. 1 clarified that Section 110(1) of the Companies Act, 2013, read with Rule 22(16) of the Companies (Management & Administration) Rules, 2014, allows companies to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that past offers or recent transactions should be relied upon to determine the offer price under the scheme. The Respondent No. 1 took pain to explain that each transaction has its unique context and pricing considerations and the current scheme of capital reduction is distinct from a buy-back under Section 68 of the Companies Act, 2013 and has been undertaken in compliance with Section 66 of the Companies Act, 2013. 87. The Respondent No. 1 denied that the Tribunal failed to give due weight to the fact that the existing minority shareholders did not desire an exit route. On the contrary, numerous identified shareholders had repeatedly approached the Respondent No. 1 seeking an exit after the delisting of its shares from stock exchanges, which rendered them unmarketable. The Respondent No. 1 stated that the Tribunal correctly noted that delisting had effectively eliminated any market platform for trading these shares, making it impossible for shareholders to sell their shares at mutually negotiated prices. 88. The Respondent No. 1 also denied that the Tribunal failed to appreciate the fair value declared by Respondent No. 1 to SingTel during the preferential allotment. The Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the report's independence and the Tribunal also concluded that the valuation was reasonable and did not necessitate another report. 93. The Respondent No. 1 contended that the Respondent No. 1 was not obligated to allow objectors to retain their shares as the overwhelming majority of Identified Shareholders approved the scheme, and no objector had the right to amend the scheme approved by the majority. 94. The Respondent No. 1 submitted that the Tribunal correctly distinguished the judgments cited by the Appellants, noting that they were not applicable to the facts of this case and the Tribunal after a detailed analysis, allowed Respondent No. 1's Petition for capital reduction. 95. The Respondent No. 1 denied that the notice given to the shareholders implied that the votes of the Identified Shareholders would have no meaning. The Identified Shareholders were aware of the voting on the special resolution by Notice of Postal Ballot/ Electronic Voting along with the explanatory statement dated 19th June, 2018 which was sent to all shareholders. The Respondent No. 1 submitted that full opportunity was granted to all the shareholders to vote by way of postal ballot or elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e per share 196.8 Rs ix DDT (Dividend distribution tax) 33.55 Rs x Offer price to minority shareholders /share) 163.25 Rs /share 99. The Appellants have challenged the Impugned Order on several grounds based on which, we find that the various issues raised are required to be examined and determined in the present appeals. 100. Issue No. I (a) Whether reduction of capital by the Respondent No. 1/ BTL was in accordance with Section 66 of Companies Act, 2013. (b) Whether selective capital reduction was permissible in terms of Section 66(1)(b)(ii) of the Companies Act, 2013. (c) Whether the Appellants minority shareholders could have been compelled to be ousted from the equity holding by passing resolution by majority of shareholders despite unwillingness of the minority shareholders. Issue No. (II) (a) Whether valuation of the shares carried out by E&Y @ Rs. 196.80 was correct and in accordance with law along with established valuation practices done keeping in view the valuation of the same company done @ Rs. 310 few months back while allotting preferential shares to SingTel. (b) Whether the valuation done by E&Y Merchant banking division was really "Independent" or w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 66(1) of the Companies Act, 2013. It is observed that Respondent No. 1 had not accepted any deposits and was not in arrears of repayment of principal or interest. Consequently, the proviso to Section 66(1) does not apply. Section 66(1) states that: - "66 (1) Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may-(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid- up; or (b) either with or without extinguishing or reducing liability on any of its shares, - (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly: Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal reduction scheme and notified the record date. This action fulfilled the requirements of Section 66(4) which is stated below: - "(4) The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the Tribunal may direct." (v) Also, the Respondent No. 1 filed a certified copy of the order with the Registrar, who issued a certificate to that effect. This satisfies the requirements of Section 66(5) as mentioned below: - "(5) The company shall deliver a certified copy of the order of the Tribunal under sub-section (3) and of a minute approved by the Tribunal showing- (a) the amount of share capital; (b) the number of shares into which it is to be divided; (c) the amount of each share; and (d) the amount, if any, at the date of registration deemed to be paid-up on each share, to the Registrar within thirty days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect. (6) Nothing in this section shall apply to buy-back of its own securities by a company under 68 Section." (Emphasis Supplied) (vi) It is observed that the necessit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther some members shall retain their shares unreduced, the shares of others being extinguished totally, receiving a just equivalent. (iv) The company limited by shares is permitted to reduce its share capital in any manner, meaning thereby a selective reduction is permissible within the framework of law (see Re. Denver Hotel Co., 1893 (1) Chancery Division 495). (v) When the matter comes to the Court, before confirming the proposed reduction the Court has to be satisfied that (i) there is no unfair or inequitable transaction and (ii) all the creditors entitled to object to the reduction have either consented or been paid or secured. " (Emphasis Supplied) (x) Above judgement categorically establish rules of majority as required by Companies Act, 2013. It has also been held that the company can do selective capital reduction in any manner and it is a domestic decision of the company and in parlance of Insolvency and Bankruptcy laws, it is commercial wisdom of the Committee of Creditors ('CoC') which is akin to majority of shareholders in the case of company like present case, leaving with very limited scope or judicial scrutiny or judicial intervention. We hold that jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o applicability to reduction of share capital under Section 100 of the Act; (iv) that the Articles of Association of the respondent Company permitted such reduction; the respondent Company had only one class of shareholders and the equity shares of the respondent Company were delisted from the Bombay, Calcutta and National Stock Exchanges between the years 2003-05 in accordance with Regulation 21(3)(a) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (v) Section 100 of the Act required passing of a Special Resolution by equity shareholders and does not require passing of a separate class resolution as provided for under Section 391 r/w Rule 61 in the case of a Scheme of Arrangement; that the procedure prescribed for sanction of a Scheme of Arrangement could not be applied to reduction of share capital; thus the resolution of the majority under Section 100 was of the entire body of shareholders of the company and not minority public shareholders; (vi) the fact that the minority shareholders are Indian and the majority promoter shareholders are foreigners is of no relevance as long as the mandate of law is complied with; (vii) there was nothing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7.1.2. In considering the application for sanction, the Court must ensure that (1) the scheme is not against the public interest; (2) the scheme is fair and just, and not unreasonable; and (3) the scheme does not unfairly discriminate against or prejudice a class of shareholders. 7.1.3. "Prejudice" here must mean something more than just receiving less than what a particular shareholder may desire. It means a concerted attempt to force a class of shareholders to divest themselves of their holdings at a rate far below what is reasonable, fair and just. Prejudice in this context must connote a form of discrimination, a stratagem by which an entire class is forced to accept something that is inherently unjust. 7.1.4. One test of such reasonableness might be to consider the past open offers, extinguishments or buy-backs, and the rate at which these were effected. Where it is found, for instance, that the present offer is significantly higher than previous ones, the burden on an objector is exponentially higher to show that even this enhanced rate, price or valuation is unfair or unreasonable. 7.1.5. Before a Court can decline sanction to a scheme on account of a valuation, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons over the scheme. It is not a valuer. It does not have the necessary skills or expertise. It cannot substitute its own opinion for that of the shareholders. Its jurisdiction is peripheral and supervisory, not appellate. The Court is not "a carping critic, a hair-splitting expert, a meticulous accountant or a fastidious counsel: the effort is not to emphasize the loopholes, technical mistakes and accounting errors". 7.1.10. Valuation is not an exact science. Far from it. It is always and only an estimation, a best-judgment assessment. The fact that a particular estimation might not catch an objector's fancy is no ground to discredit it. All valuations proceed on assumptions. Todislodge a valuation, it must be shown that those assumptions are such as could never have been made, and that they are so patently erroneous that the end result itself could not but be wrong, unfair and unreasonable. The court must not venture into the realm of convoluted analysis. extrapolation, and taking on itself an accounting burden that is no part of its remit or expertise, and no part of a statutory obligation. In particular, the court must guard against the seductiveness of a proposition that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted in the Scheme of Compromise and Arrangement. The Court observed as under : "Once the exchange ratio of the shares of the transferee- company to be allotted to the shareholders of the transferor- company has been worked out by a 36ecognized firm of chartered accountants who are experts in the field of valuation and if no mistake can be pointed out in the said valuation, it is not for the court to substitute its exchange ratio, especially when the same has been accepted without demur by the overwhelming majority of the shareholders of the two companies or to say that the shareholders in their collective wisdom should not have accepted the said exchange ratio on the ground that it will be detrimental to their interest." pr 28(7), 28(8), pr 34 and pr 37 of this judgment were relied upon by the intervenors." (xv) Another case clarifying the right of majority shareholders and valuation being technical in nature has been highlighted in the matter of In Re: Organon (India) Limited [(2010) 157 Comp Cas 287]. The relevant portion of the said judgment reads as under :- 34. In the case of Re Tata Oil Mills Co. Ltd. [ (1994) 81 Comp Cases 754 (Bom)], this Court observed thus: "...t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res available in the Books of Accounts provided to the Experts were incorrect or otherwise. Thus, there is nothing in the said Reports to indicate that the consideration weighed with the Experts in arriving at the opinion is impermissible or unacceptable. It is not possible to countenance the grievance of the objectors that the reports deprive the Court from basic information regarding justification of share swap ratio." In the said decision, the learned Single Judge noted that-"Even in the present case, no one has doubted the integrity and honesty of the valuers, who have given their share valuation report or fairness report, as the case may be. Nor the objectors have been able to point out that the method adopted by the valuers was impermissible or absurd. If so, I find no reason to discard the valuation of shares or the swap ratio determined by the Experts" (para 14) 37. In the present case, the petitioner company does not have any secured creditors as set out herein above. Not a single unsecured creditor has raised objection qua the reduction in capital proposed by the Petitioner Company. The hearing of the petition was advertised by the Petitioner Company as directed byth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een if another method would have been adopted. What is imperative is that such determination should not have been contrary to law and that it was not unfair to the shareholders of the company which was being merged. The Court's obligation is to be satisfied that valuation was in accordance with law and it was carried out by an independent body. The High Court appears to be correct in its approach that this test was satisfied as even though the chartered accountant who performed this function was a Director of TOMCO but he did so as a member of a renowned firm of chartered accountants. His determination was further got checked and approved by two other independent bodies at the instance of shareholders of TOMCO by the High Court and it has been found that the determination did not suffer from any infirmity. The company court, therefore, did not commit any error in refusing to interfere with it. May be as argued by the learned counsel for the petitioner that if some other method would have been adopted probably the determination of valuation could have been a bit more in favour of the shareholders. But since admittedly more than 95% of the shareholders who are the best judges of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. ➢ The difference of opinion between the minority shareholder and the majority shareholders regarding valuation should not be over emphasised and it is the majority will which should prevail. ➢ Reduction of share capital is pure commercial and business decision of the equity shareholder and cannot be interfered by the Tribunal. (xix) As regard, issue whether the Appellants being minority shareholders could have been compelled to be ousted from the equity holding of the Respondent No.1/ BTL by passing a special resolution by the majority shareholders despite their unwillingness, we find that in the Companies Act, 2013 and the relevant regulations, certain protections have been given to minority shareholders. But no vested rights have been conferred on the minority shareholders for their continuation as shareholders of the company. The minority shareholders prima-facie have got rights of protection from the oppression and mismanagement, i.e., if the company is being run in a way which is unfair or harmful to the corporate entity or to the shareholder. Similarly, the shareholders including minority shareholders have got right to inspect company record including M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment in the case of Warsila India Ltd., In Re [(2010) 160 Com Cases 508 (Bom)]. (xxiv) Valuation shares in the scheme of reduction of capital is an important aspect, but merely because the determination of the share exchange ratio or the valuation of shares is done by a different method which might result in a different conclusion would not justify interference of the court unless found to be unfair. The court does not have the expertise nor jurisdiction to delve into the deep commercial wisdom exercised by the creditors and members of the company who have approved the scheme by requisite majority. Thus, where the valuer has used widely accepted methodologies i.e. the discounted cash flow methodology and the comparable company's methodology which inter alia includes P/E multiple analysis for valuation of shares, there is no reason why the valuation report of the valuer should not be accepted. This is supported by the judgment in the case of Wartsila India Ltd v Janak Mathuradas, [(2010) 99 CLA 463 (Bom)]. (xxv) We note that the provisions of SEBI (LODR) Regulations, 2015 are applicable to only listed companies. We also note that at the relevant time, the Respondent No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xit to minority shareholders (the Appellants) with approx. 1% unlisted shares. iii. The Appellants alleged that valuation report discounts almost Rs.11,500 Crore from the value of Respondent No. 1 in order to calculate the share price offered to Identified Shareholders. In this connection, we observe that the market capitalization of a listed company may tend to change with market movement and investors sentiment towards the company and cannot be said to be fixed for the entire financial year. The Respondent No. 1 brought to our notice that, at the relevant time the market capitalization for BAL's shares held by Respondent No. 1 was Rs. 73,748.5 Crores as noted in the Valuation Report. We also need to bear in mind that the Valuation Report gave detailed formula and steps for arriving at Adjusted Net Asset Value of Respondent No. 1 by factoring in requisite deductions, such as, total current liabilities, zero coupon non-convertible debentures and bank debt from market value of Respondent No. 1 investment in BAL which comes to Rs. 68,498 Crores. Thus, it appears that alleged variation may be on account of the applicable deductions and variables, which have also been detailed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that the valuation is ex-facie unreasonable i. e. so unreasonable that it cannot be accepted. It was also held that plausible rationale provided by a valuer is not be readily discarded merely because an objector has a different view. It was held that valuation is not an exact science and all valuations proceed on assumptions and to dislodge a valuation, it must be shown that those assumptions as such as could never have been made, and that they are so patently erroneous that the end result itself could not, but be wrong unfair and unreasonable. We find the ratio laid down in case of Cadbury India Ltd. (Supra) is quite explicit and hardly leaves any scope for interference by this Appellate Tribunal on the issue of valuation. vii.The said judgement noted that the jurisdiction of the court in sanctioning a claim of merger is not to ascertain with mathematical accuracy if the determination satisfied the arithmetical test, and the court is not required to interfere only because the figure arrived at by the valuer was not as better as it would have been if another method would have been adopted. It was held that what is imperative is that such determination should not have been co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the NCLT i.e. Rs. 2445 per equity share, a sum equivalent to 20.56% of the said amount (Rs. 2445) within eight weeks Rs. from today. This direction would apply obviously to the respondents in these appeals who were also the appellant(s) before the NCLAT. 2. The impugned order is hereby set aside; the approval granted by the NCLT shall stand modified in terms of (1) above. The appeals are partly allowed in the above terms." Thus, the judgment cited by the Appellant does not help their cause. xii.Under Indian law, theoretically speaking an internal auditor is free from any undue influence of company in its auditing. This is also mandated by the ICAI standard on Internal Audit (SIA) 2, which states "the Internal Auditor shall be free from any undue influences which force him to deviate from the truth. This independence shall be not only in mind but also in appearance". This cardinal principle of independence recognized by the ICAI conclusively puts to rest any doubt with regard to independence of Ernst & Young LLP and therefore any purported influence that it may have on the Independent Valuation by one of its distinct legal entity alleged part of global Ernst & Young Group. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We hold that mere suspiciousness is not valid ground as such, Rule 14 is also not seen to have been violated. xviii.Under Rule 15, the duty has been imposed on the valuer to discuss and disclose any possible source of conflict of duties and interest to the client. Since, no such genuine and real conflict has been established, we do not find that Rule 15 is also not applicable. xix. Rule 17 simply says that valuation should not be involved "Mandate Snatching" or offering "convincing valuations" to the client. We have seen that the valuer was not involved in any of such activity and rather has given fairly detailed valuation report indicating assumption, presumption, facts and figures and methodology therein. xx. In fine, we do not find any violation of Rule 13, 14, 15 and 17 by the independent valuers as alleged by the Appellants and the contention of the Appellants on this account stands rejected. xxi. We note that as the Respondent No. 1 also obtained a Fairness Opinion' dated 19.06.2018 on the Valuation Report by a Category I Merchant Banker - SPA Capital Advisors Limited, which too affirmed the conclusion arrived at, in the Valuation Report by Ernst & Young Merchant Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent valuers, namely ICICI Securities Ltd and SBI Caps Securities Ltd., who were appointed by the said Custodian in 2019, based on objections raised before the Custodian by certain identified shareholders, with respect to the valuation of shares. Both the said independent valuers, namely ICICI Securities as well as SBI Caps Securities Ltd., have confirmed and reaffirmed that the valuation report obtained by the Respondent No. 1 from Ernst & Young Merchant Banking Services Pvt. Ltd is fair and proper. xxv.The Special Court (TORTS) allowed the Application filed by the Custodian vide its order dated 11.12.2020, while also considering objections raised by the original shareholders, including inter alia on the issue of valuation. The said order of the Special Court was not interfered with by the Hon'ble Supreme Court of India vide order dated 02.05.2023, in an appeal filed by the notified parties [Civil Appeal No. 2684 of 2021]. xxvi. We note that the process of valuation as done by Ernst & Young Merchant Banking Services Pvt. Ltd, in the present case has also passed through judicial scrutiny at Mumbai High Court as well as before the Hon'ble Supreme Court of India in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, in addition to various empirical data. It may be perception of the minority shareholders like the Appellants in the present case that the valuation could have been better and control premium should have been given to them and to buttress the point, the Appellants indeed engaged yet another valuer Mr. Manish Popat, who opined that DLOM should not have been applicable in the present case. v. In this connection, we note the pleadings of the Respondent No. 1 that Mayur Popat was a partner in Bathiya Legal, i.e. the law firm with which the advocate of majority of Appellants before this Appellate Tribunal, namely Mr. Anirudh Suresh was associated at the time of filing of those appeals. The Respondent no. 1 alleged that this material fact has been concealed from this Appellate Tribunal which demonstrates patent conflict of interest and unreliability of such valuation report. The Respondent No. 1 further argued that the LinkedIn profile of Mr. Mayur Popat evidences the same. However, we just note the pleadings of the Respondent No. 1 and do not wish to go deeper in such allegation of the Respondent No. 1. vi. We note that Ernst & Young Merchant Banking Services Pvt. Ltd, has used & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-IPO and post-IPO shares helps to identify the discount due to the limited marketability of the stock prior to the offering. * The Option Pricing Method (OPM): This is to calculate DLOM assuming that the limited liquidity of an asset is similar to put option and consider several factors including-The volatility of the asset, which reflects price fluctuations over time, the expected holding period until a liquidity event, indicating how long the asset will remain illiquid, the company's dividend yield and the risk-free interest rate, used as a baseline for comparison etc. xi. There are also Qualitative Approaches in addition to mathematical models, which are also crucial in determining the DLOM, as they allow for specific evaluation based on the unique circumstances of the company being valued which includes Company-Specific Factors like financial health and size of the company, Company-Specific Risks, Market and Industry Conditions, Legal and Contractual Considerations. xii. For valuations of non-listed companies, like the Respondent No. 1/ BTL, the DLOM is particularly important because it reflects the reduced marketability of shares compared to publicly traded stocks. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders did not have the ability to influence any major decision of the Respondent No. 1. Thus, the question of a control premium does not arise as there is no change in control of the Respondent No. 1 pursuant to the capital reduction. xix. We find that the independent valuer has discussed the issue regarding DLOM in great details which has also been taken note by the Tribunal while passing the Impugned Order. Independent Valuers have taken into consideration various factors including the event of no liquidity post delisting of the shares and the prospects of liquidity event for minority shareholders, and non-payment of dividends post delisting. Similarly, the Tribunal also considered the issue at length, considering various case laws mentioned therein and accepted the 25% DLOM arrived at, in the Valuation Report. xx. Thus, we hold that there is no error in the Impugned Order which allowed scheme based on Independent Valuer report which provided 25% discount for DLOM in arriving at fair value of Rs. 196.80 per shares. We have already noted that in the present case, there seems to be no case of control premium which the Appellants have claimed, simply as majority of shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the first mentioned company shall, if the extent of such shareholding is not less than two per cent. of the paid-up share capital of that company, also be set out in the statement. (3) Where any item of business refers to any document, which is to be considered at the meeting, the time and place where such document can be inspected shall be specified in the statement under sub section (1). (4) Where as a result of the non-disclosure or insufficient disclosure in any statement referred to in sub section (1), being made by a promoter, director, manager, if any, or other key managerial personnel, any benefit which accrues to such promoter, director, manager or other key managerial personnel or their relatives, either directly or indirectly, the promoter, director, manager or other key managerial personnel, as the case may be, shall hold such benefit in trust for the company, and shall, without prejudice to any other action being taken against him under this Act or under any other law for the time being in force, be liable to compensate the company to the extent of the benefit received by him. [(5) Without prejudice to the provisions of sub-section (4), if any default is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... updating. Explanation: - For the purpose of this rule, the term "records" means any register, index, agreement, memorandum, minutes or any other document required by the Act or the rules made there under to be kept by a company. 28. Security of records maintained in electronic form- (1) The Managing Director, Company Secretary or any other director or officer of the company as the Board may decide shall be responsible for the maintenance and security of electronic records. (2) The person who is responsible for the maintenance and security of electronic records shall- (a) provide adequate protection against unauthorized access, alteration or tampering of records; (b) ensure against loss of the records as a result of damage to, or failure of the media on which the records are maintained; (c) ensure that the signatory of electronic records does not repudiate the signed record as not genuine; (d) ensure that computer systems, software and hardware are adequately secured and validated to ensure their accuracy, reliability and consistent intended performance; (e) ensure that the computer systems can discern invalid and altered records; (f) ensure that recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No. 1 submitted that the notice specifically provided that all relevant documents including the valuation report could be inspected at the registered office of Respondent No. 1. v. We will take into account the relevant portion of the Notice of Postal Ballot/ Electronic Voting and Explanatory Statement dated 19.07.2018 which reads as under :- "(f) The Memorandum of Association and the Articles of Association of the Company, and other related documents, including the Valuation Report by the Independent Valuers, Fairness Opinion and list of creditors of the Company, are available for inspection at the Registered Office and Corporate Office of the Company on all working days between 11.00 a.m. (IST) to 1.00 p.m. (IST) up to and including the last date of voting on the Postal Ballot/E-voting" (Emphasis Supplied) vi. We find that the notice was therefore in compliance with Section 102 of the Companies Act, 2013. vii. The Respondent No. 1 brought to our notice that vide email dated 12.07.2018, an inspection was provided to the counsel of the Appellant and the same fact has also been recorded by the Tribunal in the Impugned Order upon appreciation of the relevant materials on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies Act, 2013 and the relevant regulations that the meeting of AGM/ Extraordinary General Meeting need to be held in physical mode. In fact, the law provides for holding meetings in virtual mode and passing the resolutions through electronic mode or postal ballots. ii. Further we also find that the passing of the resolution through postal ballot and e-voting without conducting personal/physical voting was not violative of the rights of the Identified Shareholders and it was not meant to avoid free exchange of views and ideas amongst the Identified Shareholders. We also find that the Tribunal correctly held that the present business at the meeting was not covered by the exceptions and postal ballot helped voter participation and Postal Pallot process is a process to protect the interest and democracy of shareholders. We note that the Tribunal has rightly accepted the Respondent No. 1's submission that where, the Annual / Extraordinary General Meetings are held at any one location, the shareholders find it burdensome and very difficult to travel all the way to such location just to attend the meeting in person and therefore the process of Postal Ballot and e-voting helped ..... X X X X Extracts X X X X X X X X Extracts X X X X
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